Four key behavioural changes could help people spend their pension more
effectively, a study has found.

Britain is a nation of thrifty savers and retirement splurgers, if the latest report from the Pensions Institute at Cass Business School is to believed.

Its report, Spend More Today: Using Behavioural Economics to Improve Retirement Expenditure Decisions, found that while we have learnt to save adequately for retirement, once we get there we underestimate how much money we will need.

The study said there were four key behavioural changes that could help people spend their pension more effectively. It said that Britons saved diligently, but once they had built up their pension they sometimes made poor decisions about their annuity.

Laith Khalaf, a pensions analyst for Hargreaves Lansdown, said: "This report has a simple message: pension investors can make rational decisions, but sometimes we need to be nudged in the right direction."

David Blake, director of the Pensions Institute, says that behavioural economics – that is learned financial habits – can be used to encourage Britons to budget better in retirement. Mr Blake, and his co-author of the paper Tom Boardman, visiting professor at Cass, detail how behavioural economics have successfully been used to teach people how to save while they work.

Programmes such as pension auto-enrolment, and the Save More Tomorrow plan, under which your pensions contributions increase automatically as your salary goes up, have worked to ensure people are prepared for retirement.

"Auto-enrolment, which comes into place in 2012, will use inertia to encourage people to start saving for a pension," said Mr Khalaf. "After the initial 'nudge', people will continue to make contributions."

Mr Blake wants to see similar programmes put in place once they have retired to overcome the adversity people feel to paying out for an expensive annuity. Unless they cough-up the cash in the beginning, they may find themselves left with insufficient income, for an insufficient number of years.

The recommendation of the report is that retirees use a Speedometer (Spending Optimally Throughout Retirement) plan. This plan advocates four behavioural "nudges" – action points to change behavioural economics.

The first suggestion is that savers make a plan, with or without an adviser, for retirement. Then the report recommends "automatic phasing of annuitisation".

Mr Khalaf explained: "This refers to buying an annuity in stages. So if you have £200,000 in a pension, rather than buying an annuity in one go, you use £50,000 to buy an annuity. Then next year you come back and use another £50,000 to buy another annuity, and the next year, and the next year, you do the same."

The third behavioural nudge advocates money-back annuities, where if a pensioner dies within five years of taking out the policy, the remainder of the pension pot is returned to their estate. This encourages retirees to be more generous when buying an annuity as the capital protection offered helps assuage peoples fear of losing their assets.

The final "nudge" is the paper's slogan – "spend more today". This may seem unusual for a retirement planning paper from the Pensions Institute, but Mr Blake and Mr Boardman say that by putting long-term plans in place we can ease the pressure of worrying about the future and enjoy our disposable income more.

Mr Khalaf said: "People can make good pension decisions, but policy-makers need to make sure incentives are right so individuals chose the most suitable option for them."

The study re-emphasises the importance that workers learn to make their pension pot last given that we are living longer, while research this week showed that once you have retired, you feel inflation at lot more keenly.

According to research by Age UK, pensioners are more than £700 worse off a year due to the rising cost of living. They are hit by inflation more than other people because basics make up a larger proportion of their spending.

The new inflation measure from the charity – called the Silver RPI – shows that those aged between 65 and 69 are the worst hit, paying £710 extra a year compared with January 2008.

The figure is £500 for those aged 55 to 59 and £640 for those aged 60 to 64. It then falls gradually for those aged over 70.